Insolvency anomoly-bankrupted by the trustee of an estate

[fakeperson]

I've just been involved in an interesting case where the executor of an est $1m estate, claimed to have no security to cover a small debt owed to the estate by a beneficiary of the will. This resulted in the beneficiary being adjudicated bankrupt on the petition of the executor, with the estate encouraged by lawyers Roger Chapman and John Stevens from the Wellington firm of Johnston Lawrence, to effectively sue itself and spend several hundred thousand dollars to recover a debt owed by someone it owed a greater amount!

The debt was around $5k in Court costs, awarded against the beneficiary for losing an application to the Court for disclosure of the estates financials. This occurred before the executor had obtained probate( legal title to act for the property) of the will, but the Court waived that requirment and also allowed the costs of the bankruptcy to be taken out of the beneficiaries (greatly reduced) share of the estate.

This took place in the High Court of New Zealand, where the Statute of Set-Off 1729-34 is still in force and my search of equitable precedent, on the Lexis Nexis/ Butterworths database, indicates that this is the first time in nearly 300 years that someone has managed to persuade a Court to allow an executor to bankrupt a beneficiary of a mutual estate.The Official Assignee of New Zealand and the court some how then decided that a debts between the executor and beneficiary of an estate were provable in bankruptcy.

The beneficiary simply discovered the executor of his mother's estate had been inflating accounts. He sought an order from the court for financial disclosure ( which is the only means of enforcing a trust relationship) and lost. Before the executor had obtained probate (ie title to the estate) He was taken bankrupt on those costs even though he was entitled to a third share of the estate in question. Clearly, you should not be able to bankrupt anyone if you are the person holding onto funds belonging to the person you seek to bankrupt.

Here is another case where set off was allowed- http://www.familylawweek.co.uk/site.aspx?i=ed65461

Or you could check out this link http://books.google.co.uk/books?id=5x4z ... cy&f=false

THE STATUTES OF SET-OFF -which have been made perpetual

2.1 The provisions conventionally referred to as the Statutes of Set-off are contained in two statutes from the reign of George II. The first is s 13 of 2 Geo II c 22 (1729) which states:

And be it further enacted by the Authority aforesaid, That where there are mutual Debts between the Plaintiff and Defendant, or if either Party sue or be sued as Executor or Administrator, where there are mutual Debts between the Testator or Intestate and either Party, one Debt may be set against the other, and such Matter may be given in Evidence upon the General Issue, or pleading in Bar, as the Nature of the Case shall require, so as at the Time of his pleading the General Issue, where any such Debt of the Plaintiff, his Testator or Intestate, is intended to be insisted on in Evidence, Notice shall be given of the particular Sum or Debt so intended to be insisted on, and upon what Account it became due, or otherwise such Matter shall not be allowed in Evidence upon such General Issue.
2.2 This Act was, however, subject to a sunset clause contained in s 14. The section was amended and made perpetual by s 4 and 5 of 8 Geo II c 24 (1735) which state:

4. And whereas Provision for setting mutual Debts one against the other, is highly just and ‘reasonable at all Times;’ Be it therefore further enacted by the Authority aforesaid, That the said Clause in the said first recited Act, for setting mutual Debts one against the other, shall be and remain in full Force forever.
5. And be it further enacted and declared by the Authority aforesaid, That by virtue of the said Clause in the said first recited Act contained, and hereby made perpetual, mutual Debts may be set against each other, either by being pleaded in Bar, or given in Evidence on the General Issue, in the Manner therein mentioned, notwithstanding that such Debts are deemed in Law to be of a different Nature; unless in Cases where either of the said Debts shall accrue by reason of a Penalty contained in any Bond or Specialty; and in all Cases where either the Debt for which the Action hath been or shall be brought, or the Debt intended to be set against the same hath accrued, or shall accrue, by reason of any such Penalty, the Debt intended to be set off, shall be pleaded in Bar, in which Plea shall be shewn how much is truly and justly due on either Side; and in case the Plaintiff shall recover in any such Action or Suit, Judgment shall be entred for no more than shall appear to be truly and justly due to the Plaintiff, after one Debt being set against the other as aforesaid.

Reasons for their introduction-

2.3 The traditional position at common law before the passing of the Statutes of Set-off was that set-off was not possible. This was noted by Lord Mansfield in 1759:

At common law, before these Acts, if the plaintiff was as much or even more indebted to the defendant than the defendant was indebted to him, yet the defendant had no method to strike a balance: he could only go into a Court of Equity, for doing what is most clearly just and right to be done.1
2.4 The precise reasons for the enactment of the Statutes is somewhat obscure, owing not least to the fact that publication of the debates of Parliament was, for most of the eighteenth century, considered to be a breach of privilege.2 The many attempts at determining the reasons for the enactment of the statutes can be said essentially to have arrived at two reasons which, stated broadly, are:

The idea that an injustice is done to the defendant in refusing the right to set-off; and

The idea that unnecessary law suits are undesirable.

[fakeperson]

Insolvent Debtors Relief Act 1729/ Official Assignee of New Zealand

UPDATE: For publication/promotion as article

The right to Statutory set-off is contained in the Insolvent Debtors Relief Act 1729 and the Debts Relief Amendment Act 1735, known together as the Statutes of Set Off. Until the 18th century there was no right of set-off in an action. A debtor(legatee) who had a mutual debt and was owed money by the creditor (an executor of a mutual estate) risked imprisonment.

The legislation was also enacted to prevent a multiplicity of court proceedings over a basic equitable principles and specifically states that "where there are mutual debts between the plaintiff and defendant, or if either party sue or be sued as Executor or Administrator, where there are mutual debts between the testator or intestate and either party, one debt may be set against the other."

The statute of set-off is still in effect in New Zealand and this has recently been confirmed by the Minister for Commerce the Hon Craig Foss.
Last month, Mr Foss answered a written question in Parliament advising that the Set-Off Act 1735 is still in force in New Zealand, by virtue of the Imperial Laws Application Act 1988. The Minister also advised that "the Official Assignee has no right to over-ride the Set-Off Act 1735 or any other statutory provision."

However the Official Assignee has taken a different view of its obligations under the legislation and has confirmed that a debt owed by a legatee to the executor of a mutual deceased estate is considered a provable debt in insolvency, effectively overriding the mandatory provisions of the Insolvent Debtors Relief Act 1729.

In contrast to the position taken by the Official Assignee in New Zealand, in the United Kingdom Insolvency set-off is mandatory. This means that:

• it cannot be restricted, extended or contracted out of by agreement of the parties
• it takes precedence over any other form of set-off exercised before the liquidation or administration of the debtor
• a court cannot ignore the rules of insolvency set-off in the exercise of its discretion

The policy reason behind this principle is that insolvency tends to involve matters of public interest and mandatory application of the regime ensures that individuals cannot 'work the system' to suit themselves by taking insolvency proceedings to the disadvantage of one party making an equitable claim.

Concern over the disparity between the regime imposed by the Insolvency Service in New Zealand here compared to the policy adopted in the United Kingdom has resulted in another written question to the Minister asking that: If the Set-Off Act is still in force in New Zealand, why are debts owed by a legatee to the executor of a mutual deceased estate still considered provable in insolvency by the Official Assignee ?